Calculated Risk: Land Banking Filters into Sunshine State

The sky-high prices at which shopping centers are trading hands today is leading some private equity players to greener pastures in Florida. Apollo Real Estate, in partnership with the Adler Group of Miami, has raised $25 million to focus strictly on land acquisitions in Florida for potential future retail development. This practice – commonly referred to as land banking – speaks volumes about Apollo’s confidence in the Florida retail market and its willingness to deploy capital into that market.

Over the past two years, cap-rate compression has made it all but impossible for savvy investors to purchase income-producing properties at attractive yields, a common theme expressed early this week at the International Council of Shopping Centers (ICSC) annual convention in Las Vegas.

“The one place where we thought we could be a real trendsetter and where we could create a niche for ourselves is in the area of land banking,” explains Matthew Adler, executive vice president of the Miami-based Adler Group, which has more than 40 years of development, construction, property management and experience in the Southeast. “We are doing commercial land banking strictly for what we believe are going to be great future retail sites,” adds Adler, a third-generation real estate executive.

Florida holds much attraction for a land banker. In 2004, the state’s population was nearly 17.4 million, according to the U.S. Census Bureau, which projects the number of Florida residents to reach 24.4 million by 2020 and 30.1 million by 2030. In South Florida alone, the population registered 5.9 million in 2004 and is projected to reach 6.6 million by 2020.

The Apollo fund is targeting land near major housing projects already under way in South Florida, but outside the more mature areas of Dade, Broward and Palm Beach counties. The fund recently closed on its first parcel in north St. Lucie County and has a site under contract in Clermont, located about 20 miles west of Miami.

The typical site is 20 acres but can be as large as 75 acres, and the hold period for the private equity investors is 36 to 60 months, depending on how long it takes to flip the land to a retail developer. The fund intends to place 50% debt on all its land acquisitions, so that the $25 million in capital that has been raised can actually generate $50 million of buying power.

“Given the development and regional impact (DRI) process that these residential communities go through, you can pretty much assess where the development is going very early on,” explains Adler. But it’s not only about identifying where people are going, it’s identifying what site in that area is going to be the site for a great retail center someday.”

While the Apollo fund is competing with retail developers for the same prime sites, Adler cites one key advantage the fund holds. Retail developers looking at a potential site will want to conduct extensive due diligence and make sure all the pieces fit into the puzzle before making a financial commitment. “We’re willing to commit ourselves and put money at risk much earlier than a typical retail developer.”

In fact, the Apollo fund is going one step further. Developers who help the fund source land banking opportunities will earn the right of first refusal, if an opportunity presents itself down the road. “In my mind,” says Adler, “that doesn’t make us a competitor, it makes us an intermediary.”